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IBM's DSO Rises as Revenue Keeps Falling

Since Virginia Rometty took over the company in early 2012, IBM has lost a quarter of its revenue while undergoing several transformations.

IBM's many advertisements, the visibility of its CEO and high stock price give the impression of a successful company, but a closer look shows otherwise.

In an ominous sign,International Business Machines Corp. is having to wait longer and longer to receive payments even as it attracts fewer and fewer customers, according to a review of the company's annual filings by CreditPulse. Last year, it took an average of 133.57 days, almost four and a half months, for IBM to collect its receivables while revenue declined for the fifth straight year to $79.9 billion.

The combination of a rising days sales outstanding (DSO), a common method in accounting for measuring the time it takes to turn sales revenue into cash, and falling revenue is the clearest sign yet that IBM has likely resorted to potentialy desperate measures of extending payment terms and providing favorable finance arrangements in order to generate sales. It's also an indicator that IBM's well-hyped transformation into cognitive solutions, a business unit created in 2014 for its Watson supercomputer, and cloud platforms may not have the viability investors are led to believe. CreditPulse contacted IBM for comment but did not receive a response.

IBM's DSO has skyrocketed in recent years going from an already high 100.92 days in 2011 to a staggering 133.57 days last year, an increase of over one month in the past five years (see accompanying graph). Although its not unusual for company averages to exceed the net 30-day standard, it is very unusual for DSO to rise near or above 100 days. By comparison, the average DSO for most software technology companies is 76.42 days, according to 2014 data compiled by CreditPulse.

But, the high DSO numbers at IBM are particularly troubling because they are happening against a backdrop of steadily declining revenue. Rises in DSO are not uncommon in the initial stages of a revenue decline due to a natural payment lag that briefly expands the size of the accounts receivable, but IBM's DSO has risen consistently each year at the same time revenues have consistently dropped. Eventually, in a normal environment, the accounts receivable should reflect what is happening with revenue.

As of December 31, 2016, IBM reported $29.2 billion in total accounts receivable, compared to $28.6 billion at the same time the previous year. IBM is financing a large part of its revenue as finance receivables makes up the largest portion, 65%, of the company's total A/R, followed by notes and accounts receivable at 32% and other accounts receivable at 4%. Finance receivables include sales-type leases, direct financing leases and loans, with loans making up the majority, according to company information.

IBM, based in Armonk, New York, was once the world's largest manufacturer of computers, but more recently has moved away from hardware by reinventing itself into a company that offers a combination of software and information technology services. IBM portrays itself as an innovator yet most of its technology has come via acquisitions. From 2004 to 2008, IBM gobbled up publicly-traded software companies at a rate of almost three per year often paying a premium of seven to 10 times annual revenue. In the last two years, IBM has acquired 29 companies at a cost of $9.5 billion.

Last year, IBM acquired four companies related to cloud video streaming, among them Ustream, Inc. a video streaming company based in San Francisco. Under the leadership of CEO Virginia Rometty, IBM's pattern has been to pick an area of the technology world in which it wants to compete and then go on a buying spree to acquire those companies. Forty-two percent of IBM's 2016 revenue came from technology services & cloud platforms, 25 percent from cognitive solutions and 20 percent from consulting services.

Determining exactly what kind of technology to offer seems to be a challenge for IBM as the company has reclassified or renamed its five business segments in each of the past three years. In 2014, IBM's five reporting segments were global technology services, global business services, software, systems and technology and global financing. In 2016, the names of three of those segments had changed to cognitive solutions, technology services & cloud platforms and systems.

In October 2013, following disappointing third-quarter results, Ms. Rometty sent an email to employees reaffirming the company's strategy, but criticized its sales execution particularly in computer hardware, which had declined 23 percent, according to a 2013 article in the Wall Street Journal. "Ours is a pay for performance culture and we must all be committed to taking action to address our performance gaps," said Ms. Rometty in her email.

However, just seven months later, after yet another disappointing quarter, Ms. Rometty discussed a different strategy: "In the first quarter, we continue to take actions to transform parts of the business and to shift agressively to our strategic growth areas including cloud, big data analytics, social, mobile and security," according to comments published in the WSJ. "As we move through 2014," Ms. Rometty promised, "we will begin to see the benefits of these actions."

But the benefits are hard to find as sales growth has fallen 14 percent from 2014 to 2016 and while the company has remained profitable, the declines in revenue are beginning to take a toll there too as 2016 net profit of $11.9 billion was the lowest since Ms. Rometty took over in 2012 when net profit was $16.6 billion.

Assessing the benefits of the comapny's move to cloud and big data analytics is difficult because of the way IBM keeps reclassifying its business segments. In 2015, the global technology services segment reported $32 billion in revenue. In 2016, that segment was reclassifed to include cloud platforms and reported revenue of $35.34 billion, which would infer $3.34 billion for cloud services, or 5 percent of IBM's total revenue.